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Japan is readying subsidies to help Toyota Motor Corp and key
suppliers take the lead in hydrogen-powered fuel cell vehicles that
could top $US400 million over the next several years if the most bullish
projections for the technology play out.

Prime Minister Shinzo
Abe's planned consumer rebates of at least $US20,000 per vehicle would
be the largest government support plan for hydrogen vehicles yet,
raising the stakes for a commercially unproven technology with roots in
the space race that Toyota and others see headed for the mainstream over
the coming decades.

The taxpayer-funded program would bring down
the cost of Toyota's soon-to-be-launched hydrogen-powered fuel cell car
to around $US50,000 in Japan, about the cost of a small luxury sedan
such as the BMW 3 Series.

Abe announced the outline of the plan last week and details are still being finalised.

The
cost savings could be enough to make the Toyota vehicle affordable for
taxi operators and other companies with fleets of vehicles within
driving range of the 100 hydrogen fuelling stations that Japan expects
to have built by March 2015.

"It's still difficult to make these
cars popular among ordinary consumers, but the subsidy has certain
effects on companies interested in promoting themselves as green," said
Tomohide Kazama, Senior Consultant at Nomura Research Institute. "It's a
move to plant a seed for future growth."

Fuel cell vehicles,
which run on electricity made by cells that combine hydrogen and oxygen,
have been in testing since the 1960s, when the technology was also
being developed by NASA.

Since the vehicles emit only water and
heat, they have been seen as an environmentally friendly alternative to
those powered by combustion engines.

It could also help Japan
shift to hydrogen energy as the country, dependent on imported fossil
fuel as an energy source after the 2011 Fukushima nuclear disaster,
seeks to cut carbon emissions. While much of the hydrogen used in the
country now is made from fossil fuel, the government hopes to implement
carbon-free production by 2040.

Promoting the technology last
week, a smiling Abe test-drove Toyota's fuel cell sedan, set to go on
sale in Japan by end-March, and fueled hydrogen into a Honda Motor Co
(7267.T) FCX Clarity car, currently leased to governments and some
companies.

Commercial challenges

The challenges to
commercial use of fuel cell cars have been the lack of a hydrogen
fuelling infrastructure and their high cost. Abe's government has taken
aim at both barriers in the hope of protecting an area of emerging
technology where automakers and suppliers believe they have a lead over
rivals in the United States and Europe.

The $US20,000 rebate per
car means taxpayers may support subsidies of up to around $US200 million
a year. Annual sales forecast for fuel cell vehicles in the early years
of market introduction vary from several hundred to 10,000 vehicles.

To
put 100 hydrogen fuel stations in urban areas by end-March 2015, the
ruling party has suggested a subsidy of up to $US2 million per station –
which cost $US4-5 million each to build – meaning another $US200
million in taxpayer money.

The government plans to continue
offering subsidies and tax breaks so that fuel cell cars can sell at
around the same price as gas-electric hybrids in the 2020s.

"The
subsidy is a huge driving force for sales, but it won't be offered
forever and I think the message here is that we need to continue cutting
costs," said Koichi Kojima, a senior Toyota engineer who has been
involved in fuel cell vehicle development for a decade.

The
hydrogen supply chain has been benefiting from growing interest in the
technology. Shares in Iwatani Corp, which opened the country's first
commercial hydrogen station in western Japan this month and plans to
build a total of 20 stations by 2015, jumped nearly 50 per cent this
year, while hydrogen tank maker JFE Container rose 14.3 per cent.

Besides
Toyota, Honda also plans to start selling its fuel cell vehicle in
2015. Automakers including General Motors Co and Ford Motor Co have been
working on fuel cells for years and Daimler AG (DAIGn.DE) and Hyundai
Motor Co lease fuel cell cars in the United States, but so far there are
no plans for sales in Japan.

That means the subsidy will be offered exclusively to Toyota and Honda for the time being.

The
announcement came as Washington and Tokyo are deadlocked over US access
to the Japanese auto market in talks for the Trans-Pacific Partnership
(TPP), a regional trade pact.

"I don’t see it being a friction in
terms of a trade issue," said Ron Cogan, editor of Green Car Journal. "I
see it being a useful subsidy to help automakers that are going to be
grappling with very high costs in developing very advanced vehicles."